Autor: Stefan Markus Kremeth

Dear Ladies and Gentlemen

Many thanks for your messages on my weekly mail on crude oil. I received many positive feedbacks. Thank you very much.

However, my old friend Mark noticed a mistake. I wrote: „Venezuela’s daily production stands at roughly 600 million barrels per day, while in 2017 they were producing 1.9 million on average per day“. This, of course, should have read: „Venezuela’s daily production stands at roughly 600 thousand barrels per day, while in 2017 they were producing 1.9 million on average per day“.

Please accept my apologies.

Ladies and Gentlemen, I will mostly be on vacation for the next two weeks. I will not go away but stay at home, and I will answer my emails but I will not write my weekly emails. The next regular weekly mail will, therefore, be published on August 7, 2020.

Thank you for your understanding!

Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend, a great summer, and above all, good health!

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Dear Ladies and Gentlemen

Energy prices are an essential pillar in any economy. I am generally interested in energy prices as such; today, however, I would like to focus on crude oil and on what can be expected on the crude oil price front over the next 12 – 24 months. Crude oil’s price development, directly and indirectly, touches on almost any area of daily life. As mentioned in my last weekly mail, my friend Robert made me aware of what looks like a market misconception to me. You may ask what this misconception is all about and I am happy to elaborate on it briefly.

The crude oil market is currently looking at a significant imbalance between supply and demand. The current surplus in storage, i.e. excess inventories, amounts to roughly 180 million barrels.

A balanced market is vital to OPEC members and other oil-producing countries. However, what exactly is a balanced market, i.e. a market equilibrium?

Economically speaking market equilibrium is reached when there is a perfect balance between supply and demand, which means eliminating any sort of surplus or any sort of shortage in a given product. When it comes to crude oil in the current business environment, OPEC and its friends are therefore looking at eliminating existing surpluses. The question is whether this is feasible. For that, I would like to quickly look back at recent history and at what had happened during the last crude oil crises in 2017.

In 2017 OPEC plus some other oil-producing countries (OPEC+) were able to reduce excess inventories of 152 million barrels in about ten months. This was very fast, indeed. But then in 2017, there were no lockdowns reducing economic activity, as we had painfully experienced in H1 2020.

How was it possible to reduce inventory so fast in 2017? The OPEC+ countries were cutting overall production, as they are doing today and they were cutting exports to the U.S., who at the time was increasing its oil production by roughly 1.2 million barrels per day from 8.7 million barrels at the beginning of 2017 to 9.9 million barrels at the end of 2017. Due to daily U.S. oil consumption of 18.9 million barrels per day and despite the production increase, the U.S. consumers (private and industry) were still „helping“ to reduce excess inventory by a hefty 120 million barrels in more or less ten months.

Now today, U.S. oil production is going down by at least 1.8 million barrels per day. At the beginning of the year, production stood at 12.9 million barrels per day, reached its high in March 2020 of 13.1 and stands now at 11 million barrels per day. Consumption, however, is expected to come in only slightly below last year’s 19.4 million barrels per day for the full year.

Furthermore, Lybia produces currently roughly 40’000 barrels per day, while they were producing almost 1 million barrels per day in 2017, Venezuela’s daily production stands at roughly 600 million barrels, while in 2017 they were producing 1.9 million in average per day and Iran’s exports are half of what they were in 2017. The Iraqi production again is way less than in 2017. I assume these supply-side issues will help OPEC+ to reduce the surplus.

Now, China’s consumption is expected to go down for the full year with a slump during the first and beginning of the second quarter and a steep recovery in H2. Global demand for the full year is expected to go down by some 2.5 million barrels per day for the full year, which is less than many analysts expected in April of 2020.

Ladies and Gentlemen, in addition to all of this, the low crude oil prices will lead to a significant reduction in CAPEX-investing and maintenance by oil producers, and this again will most probably lead to lower output and maybe even closures of oil wells.

What is my conclusion? I believe we will see higher crude oil prices in 12  – 24 months from now, as inventory levels will decrease drastically in H2 2020.

Ladies and Gentlemen, I am looking forward to your comments! But please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li

Furthermore, Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend and above all, good health!

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Dear Ladies and Gentlemen

Inertia is a tendency of doing nothing or remain unchanged. It can be synonymously used with words like inactivity, passivity or inaction. In most cases, inertia is terrible. We can find inertia everywhere also in the financial industry.

Inertia in the financial industry may lead to severely insufficient returns. I am very much convinced that increasing regulation favours inertia. Why may you ask? The reason is that regulation limits many participants in the financial industry and especially investment managers and analysts to speak out what they think is best. When investment managers, analysts or investment management firms risk their job or their license, they will tend not to do what they think is best for investors/clients but rather what is best to avoid complication with investors/clients or in other words they will do close to nothing and become inert. Today in any financial company, any new product and any new investment advice need to be checked by compliance and risk management before bringing it to the market. Not as you may think to prevent investors from losing money but to ensure that if an investor loses money, the investment manager, analyst or financial firm cannot be held reliable. In order not to risk any breach of the regulatory framework, potentially leading to sanctions, fines, etc. by the regulator, investment managers play it safe and do not act even if they would love to act.

Excessive regulation may lead to excessive risk aversion. However, in times of an adverse risk-free rate of return, negative interest rates on government bonds, positive return can only be achieved by embracing risk. My partner and old friend Dr Christian Schärer always says, there is no „good“ or „bad“ risk there is only well- or mispriced risk.

The concept of receiving return without taking a risk is unfortunately not available, especially not in a negative interest environment. It never really was available, even if the term „risk free return“ in investment management theory is widely spread. The term is just a term and an essential pillar in theory itself, which the name suggests, is a theory. You know, Ladies and Gentlemen, in most periods over the past decades inflation was higher than the so-called risk-free (interest) return, which means in real terms investors would receive interest on their investment, true (and mostly be happy about it). However, they would give away more than that interest to inflation, without even noticing it and like this lose money (without noticing it) in real terms to the system, i.e. governments who were financing their debt, which in real terms became less and less. This happened mainly unnoticed by the general public.

Ladies and Gentlemen, I hope Brexit will lead to some deregulation of the U.K. financial industry, which then may affect other jurisdictions. This is a long shot, I am aware of that, but I am hopeful! Next week we will have a closer look at crude oil. I sense some misconception and am happy to share interesting information that was brought forward by my friend Robert.

Ladies and Gentlemen, I am looking forward to your comments! But please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li

Furthermore, Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend and above all, good health!

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li
Web: www.incrementum.li

Dear Ladies and Gentlemen

Thank you very much for all your positive feedback on the Oscar Wilde quote. I am happy you liked it.

Today I am asking myself: Are there any signs of inflation?

Currently, we cannot say so.

We do not see any significant increase in commodity futures prices. Especially on the energy front, it even looks as if energy will be produced at ever-lower prices in the coming years. And you know what, household incomes do not reflect any sharp increase in the price of goods as of yet either.

Ladies and Gentlemen, I know some of you might not like this, but since the 1980s, the relationship between monetary developments and inflation rate does no longer seem to show statistical significance. A correlation is not recognizable. Even if one were to argue with a shadow inflation rate, there would be no positive correlation. The deflationary pressures of globalization, due to technical progress and age-related demographics, have not dissolved. Moreover, I believe these factors will remain for some time, still.

Besides, the composition of the shopping basket used for statistical purposes has continuously changed over the past 50 years. While the share of services was increased, the share of goods was decreased. Therefore, rises in wages and salaries in the service sector should lead to a more significant impact on the inflation rate than before, and yet, we can not see that. Anyway, I think you would agree an increase in inflation rates in the course of economic recovery would be somewhat healthy.

Today we do not assume hyperinflation, especially not in the case of a recession and not on a global basis.

I am interested in getting to know your views, Ladies, and Gentlemen!

Every week I am receiving emails from readers asking me about our portfolio mix. It is still the same, roughly 50% in equities and roughly 30% in cash. We are considering an increase in the equity portion over summer. Interestingly, I just read in a research paper that the bullish expectations of U.S. private investors (measured by AAII) fell from 24.4% to 24.1%. This shows that private investors remain very cautious. I keep telling our investors that as a rule of thumb, a rise in the markets only ends when private investors have also returned to the markets and become bullish. For this, we would have to see significantly more than 50% of private investors turning bullish.

Ladies and Gentlemen, I am looking forward to your comments! But please do not forget (instead of hitting the reply button) to send your messages to: smk@incrementum.li

Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend, and above all, good health!

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Dear Ladies and Gentlemen

Central Banks are doing everything to avoid economic calamities, and I am not necessarily against it. However, now it seems we are entering an entirely new phase of central bank intervention in financial markets.

Central banks are now buying corporate bonds directly in the markets. While this may seem not worth mentioning to some investors, it is rather noteworthy to me. Why? Is this going to have any sort of impact you may ask? Well, to tell you the truth, to me, this is quite a mind-boggling exercise because market forces are getting subdued more and more and on multiple levels. For example, in today’s ultra-low interest environment, one may find plenty of corporate bonds of fine companies yielding zero or (slightly) negative returns. If central banks are buying those corporate bonds, it is going to be market-distorting and effectively means, interest rates will go down even more, and those companies will not only not have to pay interest on their debt but on the contrary, will receive interest from some friendly central banks for taking up dept.

Moreover, and of course, such market interference favours fine, large, multinational companies with healthy balance sheets, and it will quite likely lead to higher concentration rather than to higher diversification. Smaller players will disappear while more significant players will become even more powerful and more significant, as they may generate interest income for taking up debt, use the money to buy up or squeeze out their competition and increase their (pricing and everything else) power.

Eventually, this increasing power may be felt by consumers and employees alike „Amazon“-like business behaviour creates wealth for a very few and not necessarily for the masses.

Ladies and Gentlemen, wealth for some very few and nothing for the masses are what in the end led to the (French – but not only) revolution. Can we still control what is happening, or is it spinning out of control? What will the result look like? What is our political leaders‘ vision?

Oscar Wilde once said: „Everything is going to be fine in the end; if it is not fine; it is not the end.“  Is what is happening today fine for large parts of our global population?

Ladies and Gentlemen, I am looking forward to your comments! But please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li

Furthermore, Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend and above all, good health!

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Dear Ladies and Gentlemen

Some new participants joined our year-end competition last week. This is perfect. Thank you very much.

After the massive rally, we have seen since the March lows, many of my readers ask me what I am expecting for the next months. Those who read my weeklies for a longer time know that I’m not particularly eager to make predictions, and yet, I get involved in a year-end competition you may think. Well, the year-end competition is for fun, and I am happy to distribute a silver coin once a year. Market predictions are a different ball game.

I cannot foresee the future, nor can anybody else. However, anyone working in the financial industry and managing assets must have at least a loose idea of where markets could be heading, and this is why I am in general, working with scenarios.

Now, what I find quite extraordinary during this crisis is the fact that market direction may change very rapidly and extensively. Two months ago, only very few people could imagine markets going up to current levels in such a short time frame. There was hardly any expert who was not seriously concerned, not to mention the media. Interestingly enough, in the last two weeks or so all of a sudden, some experts turned positive, and the press started to come up with positive market news.

But why can stock markets go up while there are increasing numbers of people losing their jobs and queuing for food?

Let me give you what I think could be a possible explanation. While average citizens may experience negative economic impacts in their life at this very moment, many institutional investors, i.e., institutional (professional) stock market participants, are already looking into 2021. Now those institutional investors see the world from a slightly different perspective. They acknowledge that politics and central banks have tied up rescue packages as quickly and comprehensively as never before, they are seeing lockdowns being lifted, consumption rebounding very slowly and yet surely, travel restarting very slowly and yet surely as well and a recession that is going to be over eventually and at the same time, they see remaining stimuli for years to come, leading to an overflow of liquidity.

…or as the CIO of a global financial institution casually mentioned this week: „the world is swimming in cash!“

That sort of liquidity will seek its way to the highest proposed returns, which due to low-interest rates, most probably will be found in equities rather than in bonds.

Ladies and Gentlemen, this is highly simplified, and of course, I don’t have a crystal ball, and of course, I can’t foresee the future, but to me, this seems like a valid explanation for what we have seen in the markets ever since March and what we might experience in the months to come.

As always, please feel free to share your ideas and thoughts to me, but please don’t forget (instead of hitting the reply button) to send your messages to smk@incrementum.li

And now, Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend and above all good health!

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Dear Ladies and Gentlemen

Time for an update on our year-end competition. The estimates are wide-spread; this is great and makes it more fun than if everybody is around the same numbers.

Gold:

The highest estimate comes from Hannes. His estimate for the 2020 year-end price stands at USD 2’000. The lowest estimate comes from myself, and I know this is rather provocative, but it is just for fun, after all. My estimate is a year-end price of USD 1’280.

Silver:

The highest estimate comes from Barbara. Her estimate for the 2020 year-end price stands at USD 45. The lowest estimate comes from Mark, and his estimate is a year-end price of USD 14.50.

S&P 500:

The highest estimate comes from Barbara again. She seems slightly bullish; her estimate for the 2020 year-end price stands at 4’500. The lowest estimate comes from John, and he estimates a year-end price of 2’100.

Currently (at the time when I was writing this message) Gold stands at USD 1’720, Silver at USD 17.76, and the S&P at 3’107.

If there are still readers out there who would like to participate, please feel free to send me a quick email and I will be happy to take you on the list. Don’t forget, you may win a one-ounce Silver coin.

Moreover, now, Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend, and above all, good health!

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein

Dear Ladies and Gentlemen

„Beware of false knowledge, it’s more dangerous than ignorance.“ (George Bernard Shaw)

More and more angry people are leading to an increasingly hostile society cultivated by ruthless heads of states. Is this fiction?

Ladies and Gentlemen, I am fully aware of the significant location advantage I was born into, I am reasonably humble, and I am also of a rather liberal spirit. Is this combination fiction?

Open borders, free markets, access to education for everyone, the best should succeed, a global safety net for less fortunate ones, respect for different perspectives, and beliefs. Is this fiction?

In the summer of 1931, the global economic crisis hit large parts of the population hard. The Bank of England was forced to borrow USD 650 million from the Federal Reserve Bank of New York and the Bank de France to stay solvent. That year in August, the Bank of England’s governor was unable to cope with the exceptional strain by the crisis and had abandoned his work and gone for a cruise and a change of scenery. Today central banks work together more and better than ever. This was and is no fiction.

Today, the Swiss government is blasting well over 100 billion (this is far more than the EU or the US or any other nation is injecting in their economies on a per capita basis) into a by a Covit-19 weakened economy, leading to the fact that entrepreneurial risks and losses are socialized, while profits stay private. This is no fiction.

So-called real assets or tangible assets favor low-interest rates. Low-interest rates are here to stay for some time. While many of those proposing real (tangible) assets are taking advantage of higher asset prices thanks to these low-interest rates, they still bash central bankers for keeping interest rates low. This is no fiction.

…and it is hypocrite!

Ladies and Gentlemen, stay woke, keep your eyes open and do not get your vision blurred by cheap cynicism from people with doubtful academic credentials, change your perspective, try to get the fullest picture possible, talk to people who are of a different opinion and try to find out why they think the way they think.

And now, Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend and above all good health!

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li
Web: www.incrementum.li

Dear Ladies and Gentlemen

Many thanks for your great help to our former assistant Cristian. He was delighted with many of you answering to his questionnaire, many thanks indeed!

I was pondering about my conviction and our conviction, i.e., the „Incrementum conviction,“ i.e., the joint cutting surface of the Incrementum partners. We have many common universal principals and ideas, but as we are human beings of a rather liberal spirit, they are by no means congruent. I think this is fantastic, and it makes our asset management meetings lively and exciting, and it leads to different approaches and products for various clients‘ needs. Some people do not understand that we can be of a different opinion and still share a respect for views; we do not share. The advantage of our free-thinking is that the chance of falling into an „effectiveness trap“ is reduced.

„Effectiveness trap,“ you may ask?

In 1968, James C. Thomson, a former Asia expert in the Kennedy and Johnson administrations, published an essay „how could Vietnam happen? An Autopsy'“ Among the reasons Thomson gave for the war was „the ‚effectiveness‘ trap“—the belief among officials that it is usually wisest to accept the status quo. „The inclination to remain silent or to acquiesce in the presence of the great men—to live to fight another day, to give on this issue so that you can be ‚effective‘ on later issues—is overwhelming,“ he wrote. The trap is seductive because it carries an impression of principled tough-mindedness, not cowardice. Remaining „effective“ also becomes a reason never to quit.

I believe that in many respects, today’s reality bears traces of the effectiveness trap of the past, and I wonder how politicians but also the electorate will get out of this without losing face. Let us assume a president of a dominant economic and military power lies to the public in an absurdly blunt way and is backed by people of his party and inner circle, who must know he is lying and still do not act in any way and let us briefly think about the public, the people who gave their votes to such a president during his campaign once but maybe will even give it a second time? How will they ever get out of this retrospectively, how will they explain their inertia at times when they should have stood up for the truth?

Stepping into the effectiveness trap is easy.

Anyway, this should not turn out to be a political message but rather show my thoughts on the effectiveness trap and on investment behavior. Currently, it seems to me, many investors have no strategy and switch between one proposed opportunity and another one without having an idea of what the ultimate goal should be and without sticking to any principles whatsoever. I am fully aware that it is easier to stick to s strategy, i.e., a plan when the markets move in favor of that very strategy, but it is probably even more important to stick to a plan when markets dot not move in favor of the approach, always keeping in mind the ultimate goal.

The Crash of 1987, the bursting of the Dotcom Bubble, the Asian Crisis, 911, the Great Financial Crisis, and now Covit-19 show similar patterns. In every crisis, you have the media going crazy, experts giving all sorts of advice, investors losing their confidence in financial markets and opportunity hunters buying into solid companies that are under pressure for a few quarters. One always hears the same mantras. This time is different. This is a real crisis. It is not only a financial crisis, etc. Ladies and Gentlemen, this time is different is a pleonasm. Obviously, no crisis is identical to another crisis. However, so far, I have not seen one example of financial markets not recovering from a crisis.

While we want to avoid the effectiveness trap, we still want to stick to our conviction because we think it makes sense. What do you think?

Please share your thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to:

smk@incrementum.li

Many thanks, indeed!

And now, Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend and above all good health!

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li
Web: www.incrementum.li

Dear Ladies and Gentlemen

I need your help. Please apologize for my being so blunt, but our former assistant, Cristian Ababii, is currently writing his master-theses to receive an MSc in Finance and needs your support.

He created a questionnaire but did not reach answers leading to the necessary sample size to show the statistical significance needed to satisfy his professors. He asked me if I could maybe help him with my network, and I would be delighted to be of help!

Now, Ladies and Gentlemen, this is where you come into play. Please take a little time and help this young man fulfill his task. He wrote a short introduction to the topic, and I am happy to share it with you:

“There is evidence showing a significant difference between assets under management directed to impact investing (investments in companies, organisations and funds with the specific intention of achieving measurable, positive effects on the environment or society in addition to a positive financial return) between the US and EU. The US investors‘ share in the impact investment market counts for 66% and the EU investors‘ share for 28%. For my thesis, I am intrigued to discover the overall investment preferences of US- versus EU investors. The assumption is that US investors are more focused on making an impact, rather than on financial return, contrary to EU investors. If this assumption proves to be wrong, the next assumption is that the governments from either the US or the EU provide investors with different investment-incentives. Accordingly, the US government provides investors with more incentives nudging them to allocate assets towards impact investments.
For my master thesis, I have created a specific questionnaire. I would be very grateful for your participation in the survey. It will take approximately 10 to 12 minutes, and it covers 21 closed questions. The survey responses are strictly confidential and anonymous.”

Please take a moment now, click on the following link and reply to the questions:

https://www.questionpro.com/t/AOzQzZg52z

Thank you very much, indeed!

And now, Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend and above all good health!

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li
Web: www.incrementum.li